Avoiding Interest, Penalties, and Criminal Record for Taxes
Under-reported or failed to report income? Over-reported expenses? Made mistakes filling out form? Forgot about a transaction? Claimed an inflated charitable donation? Been a dupe of a dishonest tax preparer?
Mistakes happen when filing taxes but, unless they are corrected properly, you or your business may be on the hook for additional interest and penalties, and may even risk a criminal record. It is easy to get caught, eventually. Did you know the CRA has information from Canadian banks, businesses, traders, etc that show how much they paid you and what for? With countries increasingly agreeing to share international information automatically, even international accounts and transactions are discoverable. There is a way for you to avoid these negative consequences by coming clean.
The Canada Revenue Agency runs a Voluntary Disclosure program. If the taxpayer meets the requirements for this program, the CRA will waive interest and penalties going back up to 10 years, and not seek criminal prosecution. To be eligible:
- The disclosure has to be voluntary;
- The disclosure has to be complete;
- The taxpayer has to be at risk of penalties; and
- The disclosure has to include information that is at least a year past due or a correction of previously filed information.
Whether or not a disclosure is voluntary can be a difficult question. For example, if you know that the CRA is investigating a company you have dealing with, and these dealings are taxable but not reported by you, you might not be seen as coming clean voluntarily.
The tax act imposes a large number of penalties in certain circumstances. It also provides exceptions to these penalties in some cases. Whether or not you meet the risk-of-penalty hurtle can also be challenging. However, if your circumstances leave you open to any of the many potential penalties, you pass this hurtle.
The final criterion of having the information be at least one year past due or a correction of previously filed information is easily analyzed.
The first three hurtles, however, can be more complicated. A tax professional is able to analyze your circumstances and make sure you meet the criteria for a valid Voluntary Disclosure. Such a professional will know what circumstance may disqualify a disclosure as not being “voluntary”, what items must be reported and how to ensure that the disclosure is “complete”, and whether your circumstances leave you open to the possibility of a penalty.
Also, there are two ways to make the disclosure – either a no-name disclosure OR a named disclosure. Only one or either of these methods may be appropriate in your circumstances.
The CRA wants you to come clean and correct mistakes and is willing to provide an incentive to do so. Although the decision to give relief is discretionary, where you clearly meet the published criteria for the program the CRA has to grant you relief. Making sure you meet the criteria, therefore, is of the utmost importance.
Disclaimer: Articles are for general information only and do not constitute tax advice. They cannot be relied upon.
Sam Faris is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters and handles disputes with CRA. He has recently published an article a business magazine: HERE.